People aged 55 and over will no longer be required to use their pension savings to buy an annuity when they reach retirement. Instead, they will be able access their pots how they wish, subject to their marginal rate of income tax.
The changes give older people the scope to take the entirety of their retirement savings in one go, or to use it like a normal bank account and withdraw cash in slices.
The new freedoms apply to the 320,000 people who retire each year with a defined contribution (DC) pension.
Around 540,000 people will be able to take control of their savings, government estimates suggest. As the reforms were unveiled in last year’s Budget, many older savers have delayed making decisions on their pension since.
While many may be tempted to re-invest their money in property or with financial firms, or to go on holidays and help family members, experts said that for many people, the best option is to resist making an immediate dash for their cash.
Concerns have been raised about the potential pitfalls of the new freedoms and that some people may fall prey to pension scams, run out of money too early or not realise the tax implications of withdrawing their money.
Most pension savers who have access to new retirement freedoms support the changes - but also fear drawbacks - a study by the National Association of Pension Funds found. Sixty-three per cent of 850 pension savers aged 55-70 said the reforms are a good idea but that there may be some downsides.
Research by PwC also raised concerns that many people approaching retirement say they are yet to be contacted by their pension provider about the new pension freedom options.
PwC said its findings suggest that either people have not been contacted, or the messages from providers have not hit home and people have dismissed them as irrelevant.
However the Government has set up a free, impartial Pension Wise service to offer guidance to all those eligible for the freedoms.
Ros Altmann, the Government’s business champion for older workers, said the move heralds the “start of a 21st century pension system, not a 20th century system where the pensions industry and the Government knows best” about what people should do with their money.
Pensions minister Steve Webb said: “It is right that people should have the power to make their own decisions about how they spend their own money after decades of careful saving - ending the effective obligation to buy an annuity will give people back control of their financial affairs.”
Louise Hanson, director of advocacy at the Association of British Insurers advised people not to panic and to avoid the temptation of making a dash for their cash.
“The only sensible advice is to take time to fully consider your options and contact the free, impartial Pension Wise service,” she said.
Outlining one pitfall of withdrawing large sums over a short time period, Laith Khalaf, a senior analyst at Hargreaves Lansdown, added: “If you’re a basic rate taxpayer who has built up a relatively large pension (and you cash it in), you could end up paying a higher rate of tax.”
The reforms also mean people will have the power to pass their unused DC pension funds to a nominated beneficiary when they die.